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Should I Invest In Monitise Plc Now?

monitiseWhat a great idea to have 11 years ago! Using mobile phones for banking and paying for things — brilliant! It’s so obvious. With mobile phones in almost everyone’s hands, almost all the time, it must have seemed like a vision that couldn’t fail.

Indeed, from that innovative idea, Monitise (LSE: MONI) built the world’s first mobile banking, payments and commerce ecosystem. Today, the firm provides services to more than 350 financial institutions and other leading brands globally, it has about 30 million users and enjoys strategic partnerships with the likes of Visa, Visa Europe, RBS, Telefónica Digital and FIS, all with the aim of delivering mobile money services. Monitise reckons it now processes around 4bn mobile transactions annually to the value of about $90bn.

Riches beyond the dreams of avarice

What a story. Seeing the potential and driving the vision to reality must surely have made the founder a fortune — PLC-style executive remuneration packages are not to be sniffed at. Investors, too, caught the whiff of potential for a glittering prize and piled into the shares, driving them from below 5p in 2009 to around 80p at the beginning of 2014. The directors aren’t the only people getting rich on the vision.

Today, though, the shares stand at around 29p. 2014 has been horrible for share-holding believers reluctant to give up on the dream. Yet it’s easy to see why investors hold on, Monitise’s top-line growth is a thing of beauty and seems to vindicate those hanging their faith on the original concept:

Year to June

2010

2011

2012

2013

2014

Revenue (£m)

6

15

36

73

95

Such a rate of growth. Such amazing potential, but…

All that glisters is not gold

When we find a racy new start-up with potential to dominate its markets across the world we want to see gradually reducing losses as the firm’s operations gain critical mass. Then, the promise of future escalating profits becomes believable. Then, the shares deserve a high, growthy P/E rating.

What we have with Monitise is the opposite. Profits are worse than elusive; losses are actually escalating in tandem with those spectacular revenue increases. Monitise is haemorrhaging cash and the bleeding keeps getting worse:

Year to June

2010

2011

2012

2013

2014

Operating profit (£m)

(17)

(15)

(11)

(46)

(59)

Net cash from operations (£m)

(14)

(12)

(12)

(24)

(36)

This is bad news. Monitise has been in the vanguard of those developing mobile banking solutions for a decade. During that time, the firm enjoyed support from many major and critical financial institutions. Monitise seemed way ahead of its competition and seemed to dominate the market. Yet it can’t make the business model pay.

Now, things may be set to change for Monitise. In a recent announcement, Visa declares that it intends to develop in-house mobile solutions. Perhaps other critical financial service providers will follow. Suddenly, Monitise’s unique selling point, its competitive advantage, comes into question. If the firm’s services are just another commodity-style offering that’s easily reproducible, why should partners stick with Monitise, particularly now that the firm has developed the technology through to efficacy for everyone to use?

What next?

If the market is starting to fragment, Monitise needs to be financially strong at this point, if it is to survive. However, it isn’t.

An investment in Monitise is off the agenda for me, at least until the firm shows some profit.

Monitise still has a great business but the shares look risky, so I'm looking at a firm with growth  offered at a reasonable valuation, and which has been identified as The Motley Fool's Top Growth Share for 2014 and beyond by our small-cap specialist.

When growth potential meets a modest valuation, the attraction for investors like me magnifies, as in the case of this company.

You can run your own analysis over the firm to see if it could boost your portfolio returns by downloading the Fool's report, which is free but time-limited. Click here.

Kevin Godbold has no position in any shares mentioned. The Motley Fool UK owns shares of Monitise. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.